Are Injuries To Feelings Payments Taxable?

After Mr Moorthy agreed a settlement package with his employer of £200,000 as you can imagine, HMRC wanted to tax him on this. It was agreed that £30,000 of Mr Moorthy’s settlement was ascribed as injury to feelings for age discrimination.

Under Section 406 of the Income Tax (Earnings and Pensions) Act 2003 HMRC said that injury to feelings was outside the Act which says there is no tax payable “on account of injury… to an employee”. HMRC argued that the word ‘injury’ related to compensation for personal injury, not injury to feelings.

The Court of Appeal resolved definitively that injury to feelings awards do fall within the exemption that tax is not payable on compensation payments for injury to feelings. However, the Court of Appeal also said that this issue of injury to feelings is likely to occur again as with effect from the 2018/2019 tax year the tax statutes has changed to add that “Although ‘injury’ includes psychiatric injury, it does not include injured feelings.”

What this case highlights is that tax rules are always changing and because we are payroll experts and outsourced payroll is our business we are on top of all of these changes. We take away the headache of payroll processing for a wide range of corporate, education and individual employers throughout the UK. Give us a call and let’s see how we can save you time and money. Please get in touch with one of our expert team based at our Birmingham office.